NY cotton futures rise slightly higher this week

The second report that traders had to digest this week was the NCC planting intentions survey, which came in at just 9.01 million acres (down 27%), the lowest number in 30 years! This number was well below trade estimates and what’s striking is that the Mid-South is expected to plant just 1.0 million acres, down over 50% from last season.

Another important factor to consider is that 5.23 million acres or 58% of the total is located in the Southwest (Texas, Oklahoma, Kansas), an area that has been struggling with drought conditions. With so many eggs in one basket it could spell trouble if the weather weren’t to cooperate and this should keep traders on edge throughout the growing season.

The third report that gave the bulls a reason to cheer was the US export sales report, which came in at a surprisingly strong 398’300 running bales for Upland and Pima, combining both marketing years. Participation continued to be broad-based, with 17 markets on the buyers list. For the current season total sales now amount to 10.7 million statistical bales, of which 5.6 million bales have so far been exported.

We believe that the majority of these sales were done ‘on-call’, since basis offers became more attractive once futures started to outpace cash prices. The most recent on-call report shows a big jump in outstanding on-call sales of 471’900 bales for fixations on May and beyond. When mills buy on-call, it creates deferred support in the futures market, since merchants often fix the sale right away by selling futures, and then buy these futures back when mills issue their fixation orders.

So where do we go from here? From a technical point of view it looks like the May chart is forming a ‘bull flag’, which is characterized as a brief pause in a bullish trend. More often than not, this pause is resolved in the direction of the move, which is up. Of importance here is that specs recognize this as a high probability pattern and are therefore likely to act on it. Additional spec buying could overwhelm trade shorts, since they don’t seem to have a lot of bullets left.

Even from a fundamental point of view there is currently no convincing argument against higher prices, since many mills are still wide open for shipment March/April onwards and cheap supplies are increasingly more difficult to come by. We therefore feel that it would make sense for the trade to exit short positions on pullbacks.

Plexus Cotton Limited